RBI allows banks to provide partial credit enhancement to NBFCs

The Reserve Bank of India, on Friday, permitted banks to grant partial credit enhancement (PCE) to bonds issued by non-banking financial companies (NBFCs) and housing finance companies, listed with the Reserve Bank of India (RBI) and the National Housing Bank respectively.

RBI has allowed this to enable NBFCs to obtain funds from the bond market on favourable terms and to improve the bonds' credit rating. PCE is expected to assist NBFCs, and housing finance companies raise money from provident or pension funds investing in highly-rated instruments and insurance.

The occupancy of these bonds should not be less than three years and shall only be used to refinance existing debt, states the central bank. "Banks shall introduce appropriate mechanisms to monitor and ensure that the end-use condition is met," said the RBI, reports LiveMint.

RBI made this move after NBFCs and housing finance companies asked the government to make sure that confidence returns in the sector. They have also requested relaxations of the credit rating norms of National Housing Bank's related to refinancing, decreasing the criterion for years of existence to one year, contributing for 10 per cent of the loan loss by bank's capital infusion and the government.

The central bank also limited the exposure of a bank through PCEs to bonds assigned by each NBFC or housing finance company to one per cent of bank's capital funds within the current borrower exposure limit.

Banks are permitted to give PCE as the non-funded subordinate in the form of conditional credit only used in case of cash flow shortfall for maintaining the bonds, therefore improving the credit rating of the bond.

The credit crunch that followed the IL&FS crisis saw the RBI providing special incentives to banks to enable the flow of funds to NBFCs. It has permitted banks to use government-issued securities as high-quality level 1 liquid assets equal to the bank's incremental offering to NBFCs and housing finance companies. The RBI has also increased banks' limit for offering their capital to a single non-infra funding NBFC from 10 per cent to 15 per cent till 31 December